The lifeblood of any business’s success is its cash flow. Ideally, you want the inflow of revenue to exceed the outflow of cash spent on expenses. However, understanding the importance of your cash flow and knowing how to optimize it are two very different things. The multiple flows of money from investing, operations, and financing can quickly become challenging to manage and keep organized.
This guide will take you through nine of the best ways to get the most out of your cash flow. There are all kinds of techniques you can implement for maximum effect—and some don’t require any additional spending at all! Without further ado, let’s get into it.
1. Establish an Incentives and Penalties Scheme
Cash inflow from revenue relies upon your customers paying their dues on time, preferably as soon as possible. Unfortunately, most people aren’t too eager to give up their money, even if they have already received your product or service. It can be difficult to get payments from your customers even though you are entitled to them.
While this doesn’t seem fair, it is often the way. So, how do you encourage them? Through a variety of incentives and penalties.
One of the most common penalties is charging your customers higher rates if they fail to pay on time. The point here isn’t to make money from missed payments but encourage timely ones.
Conversely, a popular incentive is to offer discounts if they pay early. The discount needn’t eat into your profit, and the benefit of an early bird discount program is that it helps you keep a more steady inflow of revenue.
2. Cut Unnecessary Spending
Running a business can be expensive, but you could be surprised by how many little costs fly under your radar. They may only seem like small expenditures, but they build up over time and can significantly damage your overall profit margins. Identifying them can prove tricky but should be rewarding.
Examples of unnecessary spending that often gets missed include unsold stock, employee phone plans, or even paying for monthly services that are no longer profitable.
There are a lot of spinning plates involved with running a business, so it’s easy to get lost in it all, but you have to stay focused. Don’t sabotage yourself by spending money you don’t need to.
3. Lease Where You Can
Although you might like the thought of owning absolutely everything you use in your business, it isn’t the most economical approach. Try to lease or rent wherever possible, whether it’s your office building or the equipment you use. Leasing will cost you much less, both up-front and long-term, than purchasing.
Just make sure you remember what you’ve leased and don’t lose track of certain monthly payments. If you’re still paying out lease fees for equipment you no longer use, you need to end that contract ASAP. Why are you paying out for it if it isn’t improving your cash flow?
4. Check Customer Credit Scores
This one may seem a little controversial, but it’s a sound idea, especially when dealing with customers who don’t pay in full upfront.
Admittedly, this tip isn’t feasible or sensible for all businesses, and you are obligated to inform the customer about running a credit check. However, a credit check can be an excellent indicator of a customer’s payment reliability.
Conducting a credit score check can give you direct insight into the spending habits of your prospective customer. If they have a significantly low credit score, it is unlikely they will pay you back on time. Late payments will undoubtedly harm your cash inflow.
The best way to decide if this method suits your business is to ensure you have a good reason for running credit.
5. Do Frequent Inventory Checks
You undoubtedly keep a close eye on your profits, but business is much more than numbers. You also need to keep a keen eye on which products or services are the most popular with your customer base. More importantly, you need to know which aren’t as popular.
If you continue to invest in products or services that barely any of your clientele are purchasing, you’re essentially throwing money away. Unsold stock is one of the biggest drains on business cash flow.
We strongly recommend looking into your best-sellers and worst-sellers every month. Monthly check-ins will give you a clear idea of what you need to be investing in and what you should stop selling altogether.
6. Be Timely With Your Invoicing
Customers can’t pay for services when they haven’t received the invoice, so you should stay as organized as possible. The sooner you send out your invoices, the sooner they’ll get paid.
Timely invoices are crucial if you offer benefits or threaten penalties. It will feel supremely unfair if the reason for a customer’s late payment was that you were late in sending your invoice.
The most efficient method for all parties involved is to set internal reminders to send out invoices. Additionally, you can send automated reminders to your customers to pay their invoices. Some invoicing software has a reminder setting built-in, so they aren’t difficult to implement on a large scale.
You should also try your best to make your invoices easy to understand, minimizing the risk of any confusion. Include clear instructions on the amount you require and the payment methods you accept.
7. Negotiate With Suppliers
You shouldn’t undervalue your suppliers, and you should always pay fairly. Still, respectful business conduct doesn’t mean you can’t negotiate!
If you want to improve your cash flow, try reducing outgoing costs that emerge from restocking your supply line. A supplier won’t give you a reduced rate for no reason, so make sure you can think of something to offer them that will make it worthwhile.
One of the ways you can do this is by offering earlier payments in exchange for discounted rates. Most businesses are open to a bit of negotiation as it ultimately benefits both parties.
Remain fair and work on mastering the art of skillful negotiation. There’s no reason why you shouldn’t try your hand a little, especially when it can result in improved cash flow.
8. Increase Your Prices
It is not uncommon for businesses to be afraid to raise their prices. They fear their clientele will feel betrayed and may leave them entirely.
While this fear isn’t unfounded, it is pretty rare to lose your customer base just because of some price increases, especially when done incrementally.
Your customers use your services or buy your products for a reason; that doesn’t change just because you decide to charge more!
Just don’t take advantage by skyrocketing your prices. Your customers will notice that, and they won’t receive it positively.
You should notice a difference in your business after trying out just a few of these strategies for optimizing your cash flow. The good news is that you don’t have to do it all at once.
Ready to improve your cash flow and discover new ways to save or grow your business? Contact MI Tax CPA, where we put our accounting knowledge to work for you.